MARKETING
A potpourri of perspectives
By Dennis H. Pillsbury
From left to right, the principals of FCIC: Reginald E. Beane, President; Michael Camilleri, General Counsel; Luis M. Espinosa, Chief Executive Officer; and Rene M. Cambert, CLU, Chief Operating Officer.
"We run counter to the prevailing philosophy when it comes to agents. We don't require premium production. We just ask them to give us one good risk at a time. It's the converse of the 80/20 rule."
--Reginald E. Beane, President, First Commercial Insurance Company
There has been a lot of hand wringing regarding the current state of workers comp. Despite improvements in the combined ratio, the line in general still shows little sign of being able to provide underwriters with a stable, profitable book of business. The political vagaries that can influence the line, including a continuing concern over the future of TRIA, have certainly made some companies reluctant to write business in some states and for some classes. As Dennis Mealy, FCAS, MAAA, chief actuary for the National Council on Compensation Insurance (NCCI), put it at NCCI's May Annual Issues Symposium: Compared to most other lines of insurance "workers compensation continues to stand out as a line in need of attention. This is not to say that all is doom and gloom.... However, areas of concern persist."
Areas cited by Mealy include the fact that the need to strengthen prior year reserves has kept the calendar year combined ratio at 108; low interest rates are continuing to put downward pressure on the investment income potential; medical cost inflation continues to have a major impact on workers compensation, with more than 50% of the losses now tied to medical benefits; and the impending expiration of TRIA looms on the horizon.
Mealy goes on to note that "while some states are at, or near, crisis levels due to state-specific factors, most, if not all, states share in the issues of rising medical costs and terrorism."
With that as a backdrop, it is hard to imagine that an insurance provider would be interested in doing anything other than reduce its exposure to this mercurial line of business. But that isn't the case. There are people who see opportunity in turmoil. We decided to talk to a variety of individuals who continue to see the workers comp field as vibrant, interesting and worth pursuing.
First Commercial
Reginald (Reg) E. Beane lived and worked in Florida for many years and watched the workers comp system go through many changes. It was a difficult market in the mid-1990s when he decided to start an insurance company that would help alleviate some of the problems. Beane and his two partners started First Commercial Mutual Company, an assessable mutual, in November 1995, after they found they could not convince an insurance company to back them as an MGA writing small workers comp risks. Today, Beane is president of First Commercial Insurance Co. in Miami Lakes, Florida, the company that was the result of a conversion to a stock insurer in 2002. It recently added general liability and commercial auto to its product line.
"We formed the company to write small, high quality risks in Florida," Beane explains. "There was a crying need for workers comp coverage for small businesses. That was particularly important in Florida, where more than 80% of the businesses have fewer than 100 employees. We also decided to write business only through independent insurance agents, as they were the dominant marketing force in the small business market."
The company provides a guaranteed cost policy to 220 different classes. "We will look at every single risk submitted to us," Beane says. "Each risk is individually underwritten with an aim to find quality risks. We use loss control at the front end. The risk will come to us via fax and we will look at it to make certain we have the right class code and employee count. Before we quote, we do a payroll verification. We get loss runs and, in some cases, require that the client has loss control in place. We basically triage the submissions. Some we can quote right away or turn down right away. Others take time and we'll let the agent know that."
Beane continues, "We run counter to the prevailing philosophy when it comes to agents. We don't require premium production. We just ask them to give us one good risk at a time. It's the converse of the 80/20 rule. We have agents in all 67 counties and have good relationships with each one of them. Our commissions are competitive in all lines."
He concludes, "We must be doing something right. We have over a 70% retention rate and most of those who leave do so because we don't want them. We have a significant number of insureds who have been with us since the beginning. The smaller risks seem to be more loyal and will stay with you as long as you provide good service and pay claims in a timely manner, and that's what we do. And, equally important, our reinsurers really like our approach."
It seems to be working. First Commercial is now the ninth largest writer of workers comp in Florida, with premiums of $111 million last year and a combined ratio of 95. This year, the goal is to hit $150 million in premium. "We're doing just the opposite of cash flow underwriting," Beane says. "Our ultimate goal is to become a small regional company, but we plan to grow slowly so we keep our roots. We employ 50 people and have almost a family atmosphere. We don't want to lose that. We also intend to continue to write small businesses through independent agents."
Accident Fund
Accident Fund Insurance Co. of America, Lansing, Michigan, isn't exactly new to the scene, having started doing business as a state agency in 1912. However, its current circumstances are much newer. Ten years ago, it was purchased by Blue Cross Blue Shield of Michigan after the then governor decided that the state of Michigan really didn't want to be in the workers comp business. The new leadership decided it was time for the company to branch out, and in 2000 Accident Fund began its national expansion and identified 10 core states (including Michigan) where "we understood the competitive and regulatory climate," notes Keith Adkins, vice president of regional operations. "We tried to find states that were similar to Michigan." The states are: Illinois, Indiana, Iowa, Kansas, Missouri, North Carolina, South Carolina, Tennessee and Wisconsin, in addition to Michigan, which still accounts for 70% of the company's total business.
Adkins points out that these states, in general, had relatively stable regulatory environments but recognized that this could change. "We chose states where we could stay closely in tune with what was happening--where we could keep our ears to the train track. Our goal is to be a consistent market, so we want to be in markets where we can remain for the long haul."
In each state, Accident Fund hired a local business development consultant who recruited the best agencies. "These were individuals who had worked in the state for a number of years and knew the market well. It's very important that we find the best agents since, under our e-business system, we give our agents authority to write business on our behalf," Adkins notes.
He explains, "All our agents are on our e-business format from which they can bind and issue coverage if a risk meets our underwriting criteria. We are looking for small to medium-sized businesses in less volatile classes. Anything that falls outside our underwriting parameters gets referred to the business development consultant for individual underwriting."
Accident Fund, on average, has 15 to 25 agencies in each state (outside of Michigan). It seeks to be the leading writer of workers compensation in each agency and looks for production of around $200,000 within 12 to 18 months, with the ultimate goal to be at $500,000 or more. "We look for agencies that fall somewhere between the large brokers and the mom and pop shops," Adkins says. "In addition to paying competitive commissions, we also offer profit sharing." Accident Fund is also operational in 26 additional states, where the agents in their core states are able to write accommodation business if they are licensed to do so.
The company anticipates it will write just shy of $500 million in premium this year. It wrote $412 million last year. It is rated "A" by A.M. Best and was in the Ward's Top 50 in the last two years. Its appetite is for middle-of-the-road retail type operations and some smaller manufacturing and artisan contractors. "That's bread-and-butter business for a lot of agents," Adkins notes.
"To write a risk, we need to have the loss history, the number of employees, the mod and the current class," he says. "If the business is referred to our business development consultant, we will review detailed loss runs and management style to determine appropriate pricing."
California State Fund
No report on workers compensation these days would be complete without at least mentioning California. The promise of workers comp reform helped Arnold Schwarzenegger become governor. And who would know the market better than the largest writer in the state--the State Compensation Insurance Fund of California. Jim Tudor, executive vice president of the State Fund, says, "We are very positive about the reforms that were enacted. However, we also recognize how frustrating it can be for elected officials who don't see an immediate rate decrease. Most of the reforms don't take effect until next year."
Responding to some of the adverse publicity the Fund received recently, Tudor notes that "a special actuarial study by KPMG validated our reserves, as did our actuary, Milliman. We don't have a reserve problem at all. And we're slowly building our surplus back up. You have to remember," he adds, "we accommodated the market of 28 insolvent carriers. That carries an enormous surplus requirement and has created some controversy over risk-based capital issues. We would have to stop doing business to completely address those issues now. Settling those issues is a long-term goal, but we can't just stop writing business and leave California businesses stranded."
He adds, however, that the Fund is "trying to slow down new business and that creates some declinations. We have a great partnership with agents and don't like to turn down business. Fortunately, there is a market out there. It's not vibrant, but it's there. There have been a couple of new start-ups coming in now that the reforms have been enacted."
Tudor goes on to repeat what underwriters always want from agents: "Complete submissions, including loss runs. We want to be able to work with clients rather than flat turn them down. We're willing to help clients fix things. We provide complete loss control services and have an outreach program for new clients. We will contact the new client with the agent's permission and work to reduce risk."
He concludes: "Agents bring a lot to the table. We're learning to work better with them and to understand the value-added they offer. The vast majority of our business comes from agents and we want to be a strong market for them and enhance our partnership with them."
A missing ingredient
"Employers need to join hands with the medical community," maintains Frank Pennachio of The Institute of WorkComp Advisors. "The lack of communication between these two components of the workers comp system is one of the biggest gaps out there. Agents need to help their clients form better relationships with medical care providers."
Pennachio admits that it is not an easy sell. "Employers are being asked to pay more for workers compensation insurance and now we're asking them to increase their involvement in the process as well. But they're really the only ones who can do this. The insurance companies deal with the medical community from a totally different perspective that, all too often, is adversarial in nature."
In the end, Pennachio continues, effective disability management that includes involvement of both the employer and the medical provider, "gets employees back to work faster. In nine out of ten cases, employees will be back in three days or less.
"We're also advising the use of medical providers at the front end to evaluate fitness for duty before a person is hired," Pennachio points out. "If you hire right and show your employees that you're concerned about their welfare, morale is better and productivity improves and workers comp costs go down."
For other suggestions about ways agents can help their clients reduce workers comp costs, see Frank Pennachio's article, "Helping Clients Keep Workers Comp Costs Down," in the June 2003 issue of Rough Notes. *